4.1 Trade and Trading Blocs

Question 1

What is absolute advantage?

Answer 1

A country’s ability to produce a good or service more efficiently (at a lower cost) than another

Question 2

What is comparative advantage?

Answer 2

When a country can produce a good or service at a lower opportunity cost than another country

Question 3

What are 2 assumptions of the comparative advantage theory?

Answer 3

• Assumes that factors of production are perfectly mobile
• Assumes that goods are homogenous (difficult to conclude advantage if goods cannot be perfectly compared)

Question 4

What are 2 advantages and 2 disadvantages of trade?

Answer 4

• Enables greater consumer choice
• Allows countries to benefit from greater economies of scale
• Can lead to over-dependence, reliance on particular exports or imports
• Leads to structural unemployment (jobs lost to more efficient and competitive foreign firms)

Question 5

What 4 factors influence the pattern of trade?

Answer 5

• Comparative advantage
• Emerging economies (growing countries likely to need importing and exporting)
• Trading blocs and agreements
• Relative exchange rates

Question 6

What is a trading bloc?

Answer 6

A group of countries that come together and form agreements to promote trade and economic cooperation among themselves

Question 7

What is a bilateral trade?

Answer 7

An economic agreement between two countries that aims to reduce trade barriers between them

Question 8

What are 5 types of trading blocs (from lowest to highest integration)?

Answer 8

• Preferential trading areas (PTA)
• Free trade area (FTA)
• Customs union
• Single market
• Monetary union

Question 9

What are 2 aims of trading blocs?

Answer 9

- Trade liberalisation: the removal/reduction of barriers to trade
- Trade creation: trade deal agreements that promotes trade between countries

Question 10

What is a preferential trading area (PTA)?

Answer 10

A gradual agreement where trade barriers e.g tariffs are reduced only on select goods/services between member countries

Question 11

What is a free trade area (FTA) and an example?

Answer 11

Where member countries agree to remove trade barriers with one another, but impose separate trade barriers with non-member countries e.g USMCA

Question 12

What is a customs union and an example?

Answer 12

Where member countries agree to reduce/remove tariff and non-tariff barriers to ensure free trade, while imposing a common external tariff for non-member countries e.g EU and Turkey

Question 13

What is a single/common market and an example?

Answer 13

Where member countries trade freely and impose a common external tariff on non-member countries, while allowing the free flow of factors of production (land, labour, capital, enterprise) between member states e.g EU

Question 14

What is a monetary union and an example?

Answer 14

A group of countries that agree to share a common currency, which means they have a single monetary policy and exchange rate e.g EU

Question 15

What is a multilateral trade agreement?

Answer 15

A legally binding preferential trade agreement between more than two countries/trade blocs, under the guidelines of the WTO

Question 16

What are 2 advantages and 2 disadvantages of trading blocs?

Answer 16

- Free trade: leads to increased specialisation, increased output, lower prices
- Creates greater access to markets: results in economies of scale

- Loss of sovereignty: no control over monetary and come fiscal factors (problematic during economic hardship)
- Trade diversion: shifts from low to high cost member producer (reduces specialisation/comparative advantage)

Question 17

What is trade diversion?

Answer 17

The shift of importing goods/services from low-cost countries to high-cost countries (mainly occurs when country joins trading bloc or when protectionist policies introduced)

Question 18

What is trade creation?

Answer 18

The shift of importing goods/services from high-cost countries to low-cost countries (mainly occurs when country joins a trade union)